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The New Keynesians have their own 'story' as to why real wages are pro-cyclical. In the space below, prepare an essay describeing how the New Keynesians describeed this business cycle fact. In your essay, be sure to identify exactly how the real wage is determined using the efficiency wage theory. Draw and refer to a graph of the effort function along with a labor market diagram assuming, as usual, that the efficiency wage is greater than the wage that would otherwise clear the labor market. Finish your essay by showing, using only your effort function diagram (and not your labor market diagram), how a pro-cyclical real wage can be describeed by the efficiency wage theory.

Microeconomics, Economics

  • Category:- Microeconomics
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